Dow 8360?

A market that falls below its 200-week (3.8-year) average usually heads straight for its 200-month (16-year) average. I learned this concept from Belkin during the past bear market, and it was great guidance to the then-shocking deterioration in Intel (INTC, news, msgs), Cisco Systems (CSCO, news, msgs) and Oracle (ORCL, news, msgs). Lest you think that's a crazy idea, the Philadelphia KBW Bank Index ($BKX), which encompasses Bank of America and Wachovia, already is well below this level. So are General Motors (GM, news, msgs), insurer American International Group (AIG, news, msgs), International Paper (IP, news, msgs) and Merck (MRK, news, msgs). General Electric (GE, news, msgs) is close. Moreover, you should know that the 200-month average was the exact spot where the plummeting Nasdaq Composite Index ($COMPX) finally bounced and recovered in 2002. The 200-month averages for the big indexes now are 981 for the S&P 500 Index, 1,771 for the Nasdaq and 8,360 for the Dow industrials.

The average bear market of the past century has lasted less than a year and generated losses of 30%. But ones that lasted more than 12 months showed an average loss of 42%. All of these figures are averages with relatively few examples, however, and thus deceiving in their exactitude. The current bear market was caused by a perfect storm of trouble: a real-estate collapse, a credit disaster, an oil price mega-spike, recession and inflation. Will it persist for only an average amount of time and decline by only an average amount? That's an open question. Put me down as doubtful. For your score card, this bear market has so far lasted 12 months and generated a loss of 17%.

A reversal higher can be swift and big, and it is usually disbelieved at the start. Eventually, all bear markets end -- very often with a roar and when least expected. The only statistical measure that I have seen work effectively in the past 20 years to signify the end of a major bear phase is a one-two punch in which the market experiences a session in which 90% of prices and 90% of volume is to the downside, and then, within three days, the opposite occurs: a 90% upside day. Most recently, this measure -- invented by the nation's oldest technical research firm, Lowry's Reports -- kicked in to signify the end of a 3-year-old bear market in late March 2003. When that massive buying occurs, most investors don't believe the inflection point is really occurring and consider it just one more rally to sell into or short. But in reality, that has been the signature of the end of a bear. Despite recent highly volatile up-and-down trading, this combination has not yet occurred.

[via doctorm_33139]